Freeport May Build Railways to Ship Copper, Cobalt From Congo

Michael J. Kavanagh

October 22, 2010, 11:56 AM EDT

Freeport-McMoRan Copper & Gold Inc., the largest publicly traded copper producer, may build rail lines to transport ore from its $2 billion Tenke project in the Democratic Republic of Congo after agreeing new contract terms with the African nation’s government.

The resolution of the three-year contract dispute allows the Phoenix-based miner to proceed with plans to expand Tenke and eventually double production, Freeport’s Chief Executive Officer Richard Adkerson said on a conference call today. Tenke Fungurume Mining Sarl, a venture between Freeport, Lundin Mining Corp. and state-owned Gecamines, is Congo’s largest copper miner and currently exports production by road to the port of Durban in South Africa.

“Restoring the rail system in the DRC would be something that we’d jointly undertake with the country and perhaps other miners,” Adkerson said by phone from Phoenix. The company is also looking at improving the rail systems in Zambia and Angola along Congo’s southern border, he said. Adkerson didn’t say how much the rail plans might cost.

Congo holds 4 percent of world copper reserves and is one of the largest suppliers of cobalt, according to the U.S. Geological Survey. The Benguela railway, which used to connect the Zambian and Congolese copper belts to the Atlantic Ocean via Angola, was largely destroyed during Angola’s civil war. Zambia is Africa’s largest producer of copper.

The opportunity presented by Tenke’s riches convinced Freeport and Lundin to cut their stakes in the venture as part of the agreement with Congo’s government, Adkerson said.

Series of Wars

Freeport now controls 56 percent of Tenke, down from 57.75 percent, while Lundin reduced its holding to 24 percent from 24.75 percent. The reductions allowed Gecamines to increase its share to 20 percent from 17.5 percent.

Tenke was the final unresolved contract after a review by the Congolese government of all its mining deals that began in 2007 and was originally supported by the World Bank. Many of the contracts were signed during two wars that spanned almost a decade or under a transitional government that ruled for three years until 2006.

The most prominent casualty of the review process, Canadian miner First Quantum Minerals Ltd., is in the process of seeking international arbitration after Congo canceled its contract for the $750 million Kolwezi copper project. Freeport delayed expanding Tenke while the government’s contract review process continued.

‘Reasonable Compromise’

“This looks like a reasonable compromise for the government and Freeport,” Christopher Melville, Africa mining consultant with Menas Associates, said by phone from London today. “But it doesn’t detract from the fact that the review process in general hasn’t had the positive impact that many of the interested parties hoped it would.”

As the contract review dragged on, political risk insurance premiums ballooned by 40 percent, according to the African Trade Insurance Agency. Barclays Capital called the country a “maximum risk” investment on Oct. 14, partly because of the unresolved Freeport and First Quantum contracts.

The resolution of the Freeport contract proves that multinational companies can be successful in Congo, government spokesman and ambassador to South Africa Bene M’Poko said in an e-mailed statement today.

As part of the contract revisions, the Tenke venture will convert $50 million of loans into equity and pay as much as $30 million in installments as the project reaches certain milestones. The venture will also pay a further royalty of $1.2 million for each 100,000 metric tons of copper reserves above 2.5 million tons, and $5 million in so-called surface area fees.

Production at Tenke began in March of last year and Adkerson expects the project to produce 18 million pounds of cobalt and 290 million pounds of copper a year starting in 2011, up from 250 million pounds of copper this year.

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